A Guide to REITs for the Curious Investor

A Guide to REITs for the Curious Investor

REITs Can Be An Excellent Investment in a Diversified Portfolio
14
views

Real estate investment trusts (REITs) are companies that hold a portfolio of real estate properties. Most REITs manage the properties they own. REITs can be an excellent investment in a diversified portfolio, offering an income stream higher than many other types of investments. Interested in REIT investing? Here’s a guide.

What REITs Are

It’s important to note that, while REITs own real estate, they do not own them with an eye to reselling or developing property. REITs are focused on managing income-producing properties. They purchase and hold properties with an eye to their income potential.

Most REITs specialize in a type of real estate. The types include commercial (retail spaces and malls), residential (apartment complexes), healthcare (hospitals) and industrial (warehouses and storage space).

REITs as an Investment

Publicly traded REITs offer several significant advantages to investors.

First, they have a high dividend yield. REITs are required by law to pay out at least 90 percent of their income stream to investors. Many pay out more, up to 100 percent. As a result, investors in REITs can enjoy dividend payouts above what they would find in other types of investments. Over the past two decades, REITs have returned an average of nearly 12 percent to investors. The Standard & Poor’s 500, a broad index of stocks, has returned an average of over 8 percent.

Second, publicly traded REITs offer transparency. They are traded on stock exchanges, just as stocks are. As a result, their financial reporting requirements are public and can be easily accessed by investors. Buying physical real estate individually as an investment requires significant research into the condition of the property and real estate conditions that can affect the investment. With REITs, that research is performed by the REIT and made public.

Third, because publicly traded REITs are traded on stock exchanges, they are convenient both to purchase and to sell. They can be bought and sold just as stocks can be. Buying physical real estate is a lengthy process, requiring mortgage applications and financial disclosure for the investor. Buying shares in a REIT can be nearly immediate — as fast as the purchase takes to complete.

Similarly, if an investor ever wants to sell shares of a REIT, it can be done immediately. Physical real estate is not a liquid investment for those who purchase the properties. It can take a long period of time to sell property, and showing it to potential buyers takes time and effort. REITs are liquid.

Non-Traded REITs

Investors should know that non-traded REITs are a category. They operate as public REITs do, but are not traded on public stock exchanges. Investors need to go through a broker who specializes in non-traded REITs.

Investment Considerations

Taxes

REITs come with the same investment considerations that other stocks do regarding taxes. investors should remember that dividends are taxed, and be prepared to pay the tax annually.

In addition, REITs can appreciate in price in addition to the dividend, just as stocks do. If the REIT price rises, it may declare a capital gain. If so, investors will need to pay the capital gains tax.

Market Conditions

They also come with some of the same investment considerations as real estate. Real estate conditions can vary. Real estate markets can be hot, with very low vacancy rates. These allow REITs to charge optimum prices for the real estate they hold and manage. But, of course, real estate markets can also be poor, with high vacancy rates. If this occurs, prices will be low. Or, real estate markets can be average, with good but not spectacular prices.

Market conditions depend on the economy and the direction of interest rates, to some degree. A strong economy generally will lead to a strong real estate market, as company profits allow them to expand. A weak or softening economy will eventually cause real estate markets to decline, because companies retrench.

Lower interest rates make mortgages more favorable for companies. They can buy more property with the money they have. As a result, lower interest rates often cause companies to expand as well. Rising interest rates make mortgages more expensive. A climate of climbing rates can make companies reluctant to expand. It can also delay existing plans if ground has not been broken.

REIT investors should keep careful watch on economic conditions in the areas REITs are invested in. They should also keep up with the direction of interest rates. If either of these changes in a way that could affect the price of the real estate the REITs hold, investors may want to consider selling the REIT.

Portfolio Diversification

Diversification means holding different types of asset classes in one’s portfolio: stocks, bonds, real estate and cash. The advantage of diversification is that it allows investors to benefit from the upside of their chosen investments, but it protects against the downside risk of having all the portfolio eggs in one basket. If the stock market falls, for example, diversified investors can still benefit from real estate, bonds and cash. If bonds tank, diversified investors will still have stocks, real estate and cash.

While REITs can be a great investment, real estate values go both up and down. If profits go up, all is well if you’ve chosen a well-managed REIT. But if profits fall, REIT dividends may be 90 percent of a smaller pie, so they will fall as well. Many investment advisers recommend holding no more than 5 percent to 10 percent of a portfolio in REITs, so if real estate markets are adversely affected, your portfolio is protected.

REITs hold and manage commercial real estate property. They can be great investments because they offer high dividends, transparency, convenience of buying and selling and liquidity. Investors interested in REITs should research the real estate market in which they operate and keep up with economic conditions and the direction of interest rates.

Cover Image Credit: Pexels

Popular Right Now

To The Nursing Major

Is it all worth it?
106258
views

"You're going to feel like quitting. You're going to struggle. You'll have days where you'll wonder, 'what's it all for?'

You'll have days when people attempt to break you down, or challenge your intelligence, skills, and right to be where you are. You'll have moments when you question your own abilities, and perhaps your sanity - but you'll rise.

You'll rise because your strength as a nurse is not determined by one grade, one shift or one job - it's an ongoing journey of learning, honor, humility and a chance to make even the smallest difference in the lives of your patients."

Don't ever give up on achieving your dreams to be a nurse. Keep pushing forward, no matter how hard it is. Nursing is not an easy major. You will have very little, if any, time to do anything other than study. But just think about how great it will feel to connect with a patient, pray with them, and even save his or her life.

This will make all of the late night studying, weekly breakdowns, countless cups of coffee, and tests so hard all you want to do is cry, worth it. To see a patient's face light up when you walk in his or her room will make your heart melt and you'll know you chose the right major.

The kind of nurse you will be isn't based on a test grade, it's based on your heart for the people you are caring for. You may have failed a class, but don't let that ruin you. Try again and keep pushing toward your goal. Don't allow others around you to drag you down and tell you that you aren't good enough to be a nurse.

Show them how strong you are and that you will never give up.

There will be days when all you want to do is quit, I know I question my major more than once a week; however, there is a patient out there that needs you and your caring heart. You can do this, have faith in yourself that you can move mountains.

I will say that you definitely must have a heart for nursing.

Personally, I want to be a Pediatric Oncologist and work at St. Jude Children's Research Hospital. Just the thought of those precious children going through the hardest part of their lives, keeps me going so that I can be there for them. I want to be a light to my patients and their families during a dark time. When I feel like giving up, I just think about how many lives I have the chance to touch and I keep on going.

So when you feel like giving up, just think about your future patients and how you can make a difference, even if its only for one person. I love the quote from Katie Davis that states, "I will not change the world, Jesus will do that. But I can change the world for one person. So I will keep loving, one person at a time."

Even though this quote is about foreign missions, I believe it fits the mold for nursing as well.

Nurses have the opportunity to change the world for people every day. Just remember that, smile, don't give up, and keep pushing toward your goal.

Cover Image Credit: chla.org

Related Content

Connect with a generation
of new voices.

We are students, thinkers, influencers, and communities sharing our ideas with the world. Join our platform to create and discover content that actually matters to you.

Learn more Start Creating

5 Things That ALL Millennials Get Wrong About Investing

Millennials tend to save more conservatively and our aversion to taking risks may prevent us from reaching our full wealth potential.

380
views

Millennials get a bad rap when it comes to making personal finance decisions. But while we may enjoy our avocado toast, surprisingly enough, we're also saving more money than previous generations. We also tend to save more conservatively and our aversion to taking risks may prevent us from reaching our full wealth potential.

Here's what millennials get right about their money and where room for improvement exists.

1. We wait too long to start

Even though experts have long recommended starting an investment portfolio as young as possible, many millennials hesitate when it comes to opening their own trading accounts. This results in missing out on the opportunity to sit back and watch our money grow through compound interest.

Many of us utilize savings accounts but relying solely upon these avenues prevents us from letting our money do the heavy lifting for us. Most savings accounts pay relatively little in terms of interest, often less than 1%. Throwing all our money into savings accounts earns us mere pennies for each $100 we invest.

Instead, millennials need to harness the power of the stock market which provides far more in terms of long-term financial gains.

2. We overvalue cash

Because we came of age during an era of financial crisis, millennials shy away from the stock market. But this hesitancy costs us big time in terms of future economic freedom.

No reward comes without risk, and by far the easiest way to reap huge financial gains remains investing in high-yield growth stocks. The best time to take any financial risk occurs before age 35, before the expenses related to home ownership and child-rearing require more financial conservancy.

Stashing away a small amount of cash under our mattresses for emergencies can't hurt, but wasting valuable time simply saving for a rainy day impacts our long-term wealth. If you're hesitant about investing on your own, hire a qualified financial advisor to manage your investment portfolio.

3. We miss out on tax deductions

Failing to diversify investments means missing out on valuable deductions come tax time. While interest from savings accounts gets taxed at the same rate as ordinary income, the capital gains tax rate remains substantially lower.

In addition, certain types of investments, such as investments in oil and gas partnerships, allow taxpayers to take advantage of government subsidies to offset any potential risks to capital.

Millennials do themselves a disservice by failing to seize these opportunities, as experts predict no decrease in demand for these resources over the next few years.

Even making an additional contribution to a 401k or other qualified retirement account can offset tax liability but far too few of us take advantage of this potential tax-buster!

4. We don't do enough diversifying 

Even though one out of every six millennials possesses over $100,000 in assets, few take the time to adequately diversify their investment portfolio. A strong portfolio consists of a mix of high-risk, high-yield stocks, steady, reliable blue-chip stocks, bonds and other forms of property.

Failing to diversify costs us big time in the long term. No matter how much cash we stash away today, inflation remains a powerful force that decreases the value of each dollar saved over the life of our savings.

The only way to account for price increases due to inflation remains investing in the stock market, where gains have a reasonable expectation of keeping pace.

5. We ignore history

Many millennials, myself included, tend to panic when we hear news stories of the stock market rising and falling at breakneck speeds. Indeed, current fluctuations in the Dow tempt many of us to pull out of riskier investments in exchange for less risky vehicles such as bonds.

Savvy millennials, though, resist the temptation to abandon ship.

Historically, investments in the stock market pay off over the long term. Market ups and downs tend to balance out over time.

Despite saving more than ever, we millennials need to educate ourselves about the importance of building a diversified investment portfolio.

Being willing to take greater risks while we're young will lead to a wealthier, more financially free retirement down the line. We millennials must learn to make our money work for us!

Related Content

Facebook Comments